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Markets With Within-Type Adverse Selection, Anh Nguyen, Teck Yong Tan

Department of Economics: Faculty Publications

We study bilateral trade with a seller owning multiple units of a good, where each unit is of binary quality. The seller privately knows her “type”—defined by the number of lemons that she owns — and which units in her endowments are the lemons (“withintype adverse selection”). We characterize the set of informationally constrained Pareto optimal allocations and show that every such allocation must involve a trade characterized by a threshold λ^∗, with types having less (more) than λ^∗ units of lemons selling only their lemons (selling their entire endowment). We provide conditions for a …